FEDS Notes

April 21, 2014

The Federal Debt-Limit Standoff of 2013 in the Financial Accounts of the United States

When there is a legislative standoff over raising the federal statutory debt limit, the Treasury Department can use its so-called "toolbox of extraordinary measures" to temporarily obtain additional room to borrow and finance the government's operations. This note explores how the use of the Treasury's extraordinary measures during the debt-limit episode in 2013 is reflected in the Financial Accounts of the United States.

Background

The federal debt limit is the maximum amount of debt that the Treasury is authorized to issue to the public and to other federal agencies. The limit is set by law and has been increased numerous times since its inception in 1917. The limit applies to both debt held by the public and intragovernmental debt, which generally consists of Treasury securities held in numerous government trust funds including the Social Security Trust Fund and several federal employee retirement funds.

When close to the debt limit, the Treasury is authorized by law to use a number of "extraordinary measures". These measures temporarily reduce the amount of outstanding debt subject to the limit (either debt held by the public or intragovernmental debt), thereby increasing the Treasury's ability to borrow without exceeding the limit. The extraordinary measures that the Treasury has at its disposition are the following:

Suspending investments in the Thrift Savings Plan (TSP) G Fund.

The TSP, a defined-contribution retirement savings plan for federal employees, invests part of its assets in the G Fund. The G Fund consists entirely of special-issue Treasury securities that mature and are reinvested every day.1 When close to the debt limit, the Treasury can suspend part or all of the daily reinvestments in the G Fund. Since the G Fund securities outstanding are part of the debt subject to limit, an investment suspension essentially reduces the amount of debt that is subject to the limit.2 Later, once the debt limit has been raised, the Treasury is required by law to restore the investments in the G Fund, along with any lost interest.

Suspending new investments and redeeming existing investments in the Civil Service Retirement and Disability Fund (CSRDF).3

The CSRDF provides defined benefits to retired and disabled federal employees covered by the Civil Service Retirement System. The CSRDF is invested in special-issue Treasury securities that are part of intragovernmental debt and count toward the debt limit. When close to the limit, the Treasury has the authority to suspend investment of new amounts received by the CSRDF (such as interest payments on securities held by the CSRDF and the proceeds of maturing securities). The Treasury can also redeem some existing investments held by the CSRDF.4As with the G Fund, the Treasury is required to make the CSRDF whole once the debt limit has been increased.

Suspending the issuance of new State and Local Government Series (SLGS) securities and savings bonds.

SLGS are special-purpose securities that the Treasury issues to state and local governments, upon request by those governments, to assist them in complying with federal tax laws when they have cash proceeds to invest from their issuance of tax-exempt bonds. There is no legal requirement for the Treasury to issue SLGS--which are part of the debt subject to limit--so the Treasury can suspend the sale of SLGS as it approaches the debt limit.

Suspending investments of the Exchange Stabilization Fund (ESF).

The EFS is a little-used fund managed by the Treasury for the purpose of conducting certain currency-related operations. Part of the fund consists of special Treasury securities that mature and are reinvested every day. This measure works similarly to the G Fund.5

The FFB is a government corporation that acts as a financial intermediary for some federal agencies. It has the authority to issue to the public its own securities up to a certain amount, and these securities do not count against the debt limit. All government trust funds (including the CSRDF) can invest in FFB securities. This allows trust funds like the CSRDF to temporarily "move" a certain amount of securities to the FFB (via a swap), thereby reducing the amount of debt subject to limit.6

The Debt-Limit Standoff of 2013

The "debt-limit standoff of 2013" started at the end of 2012, as the debt limit was reached on December 31, 2012. At that point, the Treasury began to use its extraordinary measures, and continued using them through February 4, 2013, when Congress reached a deal that suspended the debt limit through May 18, 2013. Then, as stipulated in that agreement, the debt limit was raised on May 19 to accommodate the amount of debt that had accumulated since February 4 (so that the level of debt outstanding at that point was equal to the new limit). Because the federal government spending was in excess of incoming receipts, the Treasury was required once again to make use of its extraordinary measures in order to be able to issue additional debt to the public to finance government operations. On October 17, 2013 the debt limit was suspended again and the Treasury was able to unwind these measures.7

Effect on the Financial Accounts of the United States

Starting on December 31, 2012, and over much of 2013, the Treasury used all of the extraordinary measures at its disposition, to varying degrees. The measures that played the largest role, by far, were those using the G Fund and the CSRDF, and their use shows prominently in the Financial Accounts. The use of the SLGS, though smaller, can also be seen in the Financial Accounts.8

The G Fund

The use of the G Fund to temporarily increase the Treasury's ability to borrow can be seen in Table F.119(PDF), which is reproduced from the Fourth Quarter 2013 release of the Financial Accounts of the United States. The table shows the flow of funds relating to the federal government employee retirement funds, including both defined-contribution pension plans (e.g. the Thrift Savings Plan) and defined-benefit plans (e.g. the CSRDF).9Line 3 in the table shows the net acquisition of Treasury securities by the federal retirement funds. This includes securities held by the Thrift Savings Plan (mostly in the G Fund) as well as securities held by the National Railroad Retirement Investment Trust. As can be seen, the Financial Accounts show a negative flow of $40.6 billion (measured as a seasonally adjusted annual rate) in the second quarter of 2013, followed by a negative flow of $379.7 billion in the third quarter (all quarterly numbers are seasonally adjusted annual rates). These flows represent net decreases in holdings of Treasury securities by the retirement funds, and are driven in large part by the suspensions of daily reinvestments in the TSP G Fund as part of the Treasury's extraordinary measures (as measured by end-of-quarter balances). The fourth quarter shows a large rebound of $480 billion in the amount of Treasury securities held by the funds, reflecting the restoration of the investments in the G Fund following the budget agreement reached on October 17, 2013, which included a suspension of the debt limit until March 2015.10

To provide some perspective on the size of these flows, Figure 1 shows the quarterly flow of Treasury securities held by the G Fund, starting in 2005. The large third-quarter negative flow and the large fourth-quarter positive flow, discussed in the previous paragraph, are reflected in the last two data points in the figure. The figure illustrates the unusually large magnitude of the flows in those two quarters. Note as well that a similar pattern to that observed in the last two quarters of 2013 can be observed in the second and third quarters of 2011, corresponding to the debt-limit standoff in that year.11

The use of the CSRDF to temporarily boost the Treasury's borrowing ability can be seen in Table F.119(PDF), line 8, labeled "Nonmarketable Treasury securities". This line shows the flows of Treasury securities held by several federal defined-benefit retirement funds, including the CSRDF.12 The Financial Accounts show large negative flows of $272.6 billion in the second quarter of 2013, and of $110.3 billion in the third quarter (at annual rates). These substantial declines in nonmarketable Treasury securities holdings by the federal defined-benefit retirement funds are driven by the CSRDF, and reflect the suspension of new issuances, and the advance redemptions, of securities for that fund, that were implemented as part of the Treasury's extraordinary measures.13 Similar to the case of the G Fund, the fourth quarter shows a large positive flow, indicating a rebound in the funds' holdings of securities, reflecting the restoration of the CSRDF balances following the October 17 budget agreement.

Figure 2 shows the quarterly flow of nonmarketable Treasury securities held by the CSRDF, starting in 2005. The large fluctuations discussed in the previous paragraph are depicted by the last three data points in the figure. In addition, the figure shows a large negative flow in the fourth quarter of 2012, reflecting the use of this extraordinary measure at the end of December of that year, followed by a sizable rebound in the first quarter of 2013, as the fund was made whole after the debt-limit suspension on February 4, 2013. A similar pattern can also be seen in the second and third quarters of 2011, reflecting the use of extraordinary measures during the debt-limit standoff of that year.

Figure 2: Quarterly flow of Treasury nonmarketable securities held by the CSRDF (2005-2013)

Line 9 of Table F.119(PDF), labeled "Claims of pension fund on sponsor", shows the unfunded portion of federal pension entitlements, which represents a claim on the federal government, and includes the unfunded part of both the defined-benefit plans from line 8, and the G Fund from line 3.14As can be seen in the table, the Financial Accounts show a large increase in the unfunded portion of pension funds in both the second and third quarter, largely corresponding to the reductions in assets in both the G Fund and the CSRDF. As the retirement funds were made whole in the fourth quarter, the Financial Accounts show a corresponding reduction in the unfunded claims on the federal government.

State and Local Government Series securities (SLGS)

As part of its use of extraordinary measures, the Treasury suspended the issuance of SLGS between December 28, 2012 and February 4, 2013; and then again between May 17 and October 16, 2013. The effect of the use of this measure was relatively small, and is reflected in Table F.104(PDF) of the Financial Accounts, which shows the net flows of financial assets and liabilities of the state and local government sector, excluding state and local government employee retirement funds. Line 29 in the table, labeled "Treasury securities", displays flows of Treasury securities held by state and local governments, which include both SLGS and other Treasury securities.15 The quarter-to-quarter fluctuations seen in the table are driven almost entirely by the SLGS securities, and reflect the combined effect of the suspension of SLGS issuance and the maturity of SLGS securities previously held by state and local governments.

Effects on the bottom line of the federal government sector

The net effect of the use of the Treasury's extraordinary measures on the federal government sector in the Financial Accounts can be seen in Table F.105(PDF) ("Federal Government").16Line 47, labelled "Other Treasury securities" (that is, other than Treasury bills), shows the net change in Treasury securities outstanding (which are liabilities to the federal government). The flows seen in line 47 include the changes in Treasury securities outstanding that resulted from the use of extraordinary measures involving the G Fund and that were previously discussed. Meanwhile, lines 53 and 54 ("Nonmarketable securities held by pension plans" and "Claims of pension fund on sponsor") come straight from Table F.119(PDF), lines 8 and 9, also previously discussed.

All told, the effects of the extraordinary measures on Treasury securities and on nonmarketable securities held by pension plans lead to offsetting effects on unfunded liabilities (or claims on sponsor). As a result, the use of the extraordinary measures does not affect the liabilities of the federal government in the Financial Accounts. However, it does affect the composition between securities included in debt subject to limit and other liabilities.

2. That is, the Treasury securities previously in the G fund are essentially replaced by temporary IOUs that don't count against the debt limit. Return to text

3. This measure applies to both the CSRDF and the Postal Service Retiree Health Benefit Fund (PSRHBF). However, because the effects of using the PSRHBF are typically small, the discussion here focuses on the CSRDF. Return to text

7. The exact timing of the use of the various measures is restricted by the maturity structure of the debt. For example, in the case of the G Fund, the Treasury is essentially free to choose when to tap into the fund, as it approaches the debt limit, because the debt is rolled over daily. But, in the case of the CSRDF, the timing of the measures depends in part on when previous investments mature and on when interest payments are scheduled to be made to the fund. Return to text

8. The use of the Exchange Stabilization Fund (ESF) and the Federal Financing Bank (FFB) does not show up directly in the Financial Accounts, because securities held by the ESF and the FFB are considered "intragovernmental" holdings, and thus represent securities that the federal government owes to itself. Intragovernmental debt is generally not included in the Financial Accounts (unless it is held by a federal employee retirement fund, in which case it shows up as part of the public pensions sector). Return to text

9. In the Financial Accounts, "flow of funds" refers to the exchange of assets, and thus corresponds to the definition of "transactions" in the 2008 System of National Accounts. See the Explanatory Notes in the Financial Accounts of the United States, available at: http://www.federalreserve.gov/releases/z1/current/ . Return to text

10. Note that the Financial Accounts will only show changes that affect end-of-quarter balances. That is, in the case of the G Fund, if the Treasury suspends investments in a given quarter, but then restores the investments before the end of the quarter (as it occurred in the first quarter of 2013), this activity will not show up in the accounts. Return to text

11. The debt-limit standoff of 2011 started in the second quarter of that year, when the Treasury began to use its extraordinary measures, and concluded in the third quarter with the enactment of the Budget Control Act of 2011. Return to text

12. It also includes the Railroad Retirement Board, Judicial Retirement Fund, Military Retirement Fund, and Foreign Service Retirement and Disability Fund. The securities reflected in this line are issued by the Treasury specifically for these government trust funds, and are "nonmarketable" in that they cannot be sold on the secondary market. Return to text

13. As previously noted, the Treasury can also tap into the Postal Service Retiree Health Benefit Fund (PSRHBF). Flows in the PSRHBF were small, and can be seen in the Financial Accounts in Table F.231 (Identified Miscellaneous Financial Claims -- Part II), line 27. Return to text

14. In the case of the defined-benefit plans, the concept of "unfunded" liabilities is straightforward: the unfunded portion is the difference between the value of the pension entitlements (which is calculated using extrapolations based on earlier-year estimates by the Bureau of Economic Analysis) and the amount of securities held in the funds, from line 8. In the case of the TSP, the "unfunded" portion equals the amount that was temporarily "removed" from the G Fund as part of the Treasury's extraordinary measures. In the absence of such temporary removals of balances from the G Fund, there would be no unfunded part in defined-contribution plans such as the TSP. Return to text

15. In recent years, the SLGS have constituted roughly one-third of the total securities holdings shown in this line. Return to text

16. In the Financial Accounts, the federal government sector comprises the federal agencies, programs, and activities that are in the unified federal budget. Return to text

Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.